Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
With tuition costs rising each year, setting aside funds for college savings can be daunting. However, there are several tax options that may lessen the financial burden of college. We encourage you to review these plans with your family and your accountant to determine if one of them works for you.
Consider putting after-tax money into a Section 529 college savings account. Contributions aren’t deductible, but earnings will grow tax-free in these plans when used to pay qualifying educational expenses.
This option is best for parents and grandparents who want to save for their kids’ school tuition and other related expenses while still receiving a tax break.
The Coverdell Education Savings Account is a flexible account in which you can choose from a wide variety of investments to meet your individual needs.
This option is best for students who have education expense costs and want additional investment options for education savings.
If you’re looking for a savings option that goes beyond education, a custodial account may work well for you. With Uniform Transfers to Minors Act (UTMA) and Uniform Gift to Minors (UGMA) custodial accounts, you can generally invest in a wider variety of options versus a Section 529 plan.
This option is best for parents who give financial gifts to their kids and don’t mind handing over control of the accounts when they are 18 or older.
If you’d like to discuss these college saving options, please contact Cray Kaiser at 630-953-4900.
Age 65 has traditionally been when most people retire. In recent years, working past your mid-sixties is becoming more and more common. Working past 65 has many benefits, like continued income and employer-sponsored health insurance, but it could impact your Social Security and Medicare entitlements. If you’re planning on working past retirement, here are some helpful ways to plan so that you can make the most of your federally sponsored benefits.
Depending on your birth date, your “full” retirement age ranges from 65 to 67. You can start receiving Social Security benefits as early as age 62, but the amount will be reduced from what you’d receive at full retirement age. Anything that’s withdrawn early above the current annual amount of $17,040 will be penalized $1 for every $2 that’s taken out.
If you can, you should consider forgoing your benefits until age 70, which is when you’ll reach your maximum eligible amount. By delaying your benefits, you’ll receive a bonus percentage depending on how long you wait past your retirement age. Waiting longer than that isn’t advisable since the bonus calculations stop after age 70.
It’s important to note that if you continue to work and withdraw Social Security benefits, up to 85% of your benefits may be subject to income tax depending on your earnings. Also, you’ll pay Social Security and Medicare taxes on any income you earn regardless of whether you’re withdrawing benefits or not.
You’re automatically eligible for Medicare the year that you turn 65. There are four types of Medicare coverage:
• Medicare A: covers hospital and nursing home stays, but not doctor’s fees
• Medicare B: general medical coverage like doctor’s visits, lab tests, and x rays
• Medicare C: supplemental medical insurance through private insurance plans
• Medicare D: prescription drug coverage
It’s a good idea to sign up for Medicare A as soon as you’re eligible, since it’s free and provides additional insurance coverage even if you have a plan through an employer. Parts B and D do have premium costs and are usually used as standalone plans if you’re not covered by an employer. You can also delay signing up for B and D until you’ve stopped working. Part C can subsidize your existing insurance and sometimes includes additional benefits like dental, vision and prescription coverage.
Whether it’s to have more financial security or simply because you enjoy it, working beyond retirement can have many benefits. While working past retirement can have an impact on your tax obligations and benefits eligibility, it’s typically less complicated than it seems. To make sure that you’re choosing the best path for you, contact Cray Kaiser today.
Many of us dream of owning a second home, but a second property can be much more than your vacation destination. In addition to a getaway for your own use, renting out your second home is a great way to offset its expense and earn extra income. But just like other types of income, the IRS expects its share of tax if your property and its use fits their definition of a “vacation rental home.” Here are some ways to determine whether your second home qualifies as a vacation rental, what needs to be reported, and what you can deduct.
Vacation homes are unique because they’re somewhere in between a rental and a personal use property. Since they’re so different, the IRS has defined several special rules for the income you earn from a vacation home, as well as what type of property qualifies as a vacation home. The property doesn’t have to fit the strict definition of a ‘home,’ since the IRS classifies a vacation home as anything that has a sleeping place, toilet, and cooking facilities. If you rent any kind of property that fits their description, from a home to a houseboat to an RV, the IRS will tax the income you earn.
The rules around how a second property is used are more complicated. According to the IRS, the amount of time that your property is used for personal use will determine whether you need to report the income and what expenses you can deduct. Here are the general guidelines:
Renting your second property can be lucrative, but don’t forget that you’ll still likely need to report the income you earn from renting your property on your taxes. We can guide you through the rules and ensure that you’re getting the best tax breaks and deductions. If you have questions about renting your second home, please don’t hesitate to contact Cray Kaiser at 630-953-4900.
On June 21, 2018 the U.S. Supreme Court held that states can assert nexus for sales and use tax purposes without requiring a seller’s physical presence in the state. While you may have heard about the Wayfair case in the news, have you thought about what this may mean for your business?
Prior to the Wayfair case, mail, phone, or internet retailers of tangible goods used the Quill case for protection from the burden of collecting sales tax. According to Quill, the protection from sales tax burdens was possible because these retailers did not have a physical presence in the form of an office, storefront, warehouse, or merely having an employee solicit the sale of goods in that state. Therefore, without stepping foot in a given state, sales in that state could be made without charging sales tax. That meant it was up to the purchaser to pay use tax on the sale.
With the Wayfair case, everything changes. Here’s what happened:
Justice Anthony Kennedy, who wrote the decision, reasoned that modern e-commerce no longer aligns with the Quill case. Essentially, the Quill case is outdated with the large amount of commerce that is conducted via the internet. The Wayfair decision essentially overturns the Quill case and physical presence is no longer a requirement for states to assert sales tax collection requirements.
The Wayfair case will now allow all states to set their own laws in connection with interstate online sales. In fact, 31 states already have some form of laws in place. Effective October 1, 2018, retailers making sales of tangible personal property to Illinois purchasers will have to collect sales tax once Illinois sales reach $100,000 in outside sales or 200 transactions.
It is thought that the $100,000 in sales or over 200 transactions as determined in South Dakota may be the standard to determine economic sales tax nexus in other states. As noted above, this is the new standard for Illinois. If you are a retailer exceeding these numbers in states in which you don’t have physical presence, you may now have a sales tax collection and filing requirement moving forward. Congress may decide to move ahead with legislation on this issue to provide a national standard for online sales and use tax collection. We will keep you informed of future changes.
Cray Kaiser is here to help. Please contact us if you have any questions or would like guidance on a specific state’s current stance on sales tax nexus.
As your business grows, you may find yourself hiring employees out of state. While the growth associated with having an employee in another state is great, keeping up with the payroll compliance in each state can feel like trudging through murky waters. States have varying requirements related to withholding income tax and paying unemployment tax. Additionally, states have increased their tax compliance efforts over the years making it even more necessary that employers be aware of their responsibilities. So, if you have an out-of-state employee, here’s what you need to consider:
Generally, you are required to withhold income tax and pay unemployment tax in the state in which the employee physically works. Makes sense, right? But it’s not always so straightforward. If your employee travels into several states, you need to be familiar with each state’s requirements. Some states require withholding from the first day an employee works in the state while other states have thresholds (minimum numbers of days or minimum amount earned) that determine when withholding is required.
If your employee works in one state but lives in a neighboring state, he or she may have to file tax returns in both states. However, if the two states have entered into a reciprocal agreement, the employee would only need to file in the resident state.
Some states have formed reciprocal agreements, which exempt employees from paying income tax on wages earned within the state if the employee lives in a bordering state. That means that wages are only taxed by the employee’s resident state. This simplifies compliance for the employee, who would otherwise be required to file income tax returns both in the resident state and the state in which the wages were earned.
When an employee has a reciprocal exemption, the employer withholds income tax in the employee’s resident state but generally pays unemployment tax to the state in which the wages were earned. For example, consider an employee working in Illinois but living in Michigan. The employer would report the wages as Michigan wages on the payroll withholding reports, but the wages would be reported as Illinois wages for Illinois unemployment tax reports.
Payroll taxes are an obvious consideration when you have employees working in other states. You will also need to consider other workforce requirements of each state, including:
Additionally, be sure your workers’ compensation policy includes all employees, even those working remotely. In the case of remote workers, be sure to inform your workers’ compensation company of the employees’ duties, work area and work hours.
Asking yourself these questions is the first step in being compliant with the states and also providing the best possible state withholding for your employees. Cray Kaiser is available to assist you when these issues come into play. Please contact us anytime at 630-953-4900.
Marriage, like every major milestone, brings a multitude of changes. If you’re recently married or engaged, you may not be thinking too much about your taxes yet. But many newly married couples are surprised to discover how marriage impacts their tax situation. After marriage, a couple’s tax liability can go up or down compared to when they were single.
The so-called “marriage penalty” typically occurs when two people with similar incomes marry, which raises their tax liability. To further complicate matters, the Tax Cuts and Jobs Act has brought additional changes to the tax implications of marriage. Whether you’re soon to be married, newly married, or have been married for a long time, we recommend reviewing the new changes to the tax code that may affect how marriage impacts your tax returns.
Prior to the tax reform, couples in the middle to high income tax brackets faced a tax penalty. Now, that penalty only applies to very high-income earners because the income tax brackets are exactly double those for individual filers.
Unfortunately, that doesn’t mean that the marriage penalty has completely disappeared. Rather, the penalty has been shifted to itemized deductions. If you take the standard deduction you won’t see an impact. But starting this year, taxpayers who itemize their deductions can deduct up to $10,000 in state and local taxes. However, that limit is the same whether you file as an individual or as a married couple, so married couples effectively have that deduction cut in half.
Each individual’s situation is different, but here are the general implications under the new guidelines:
Even though the Tax Cuts and Jobs Act has created new tax liability challenges for married couples, there are also new opportunities. You can read our overview of the impact of tax reform here. Please call Cray Kaiser today at 630-953-4900 if you have any questions.
“What do you mean we have to file a tax return? I thought we were tax exempt!” Barring any unrelated business income tax and other excise taxes, nonprofit organizations normally ARE exempt from taxation. But they are NOT exempt from filing an informational return. The Form 990, Return of Organization Exempt From Taxation, and its related schedules is actually one of the most complex returns the IRS requires U.S. organizations to prepare and file.
WHY Nonprofits Have to Complete a Form 990
Completing the Form 990 is time consuming and sometimes challenging, but the IRS has valid reasons for requiring it. With the benefit of zero taxation comes dishonest applications from organizations trying to defraud the system. This leaves a huge burden on the IRS and many state agencies to create methods and filing requirements to deter and identify these fake organizations. The Form 990 and other agency registration programs like GuideStar, Tax Exempt Organization Search, and various state databases help create a stable and reliable environment for informed donors to contribute nearly $500 billion annually.
This is why filling out the Form 990 timely and accurately is critical to all nonprofit organizations trying to comply with IRS requirements, validate their exempt purpose, and attract responsible donors. Errors in filling out the form can lead to misinterpretation of your organization or worse: an assumption that you may be one of the fake organizations.
HOW to Avoid Common Mistakes
Here are 11 common errors that many 501(c)(3) organizations can make that may have unintended consequences such as notices, audits, or revocation.
1) Failure to file: Failure to file for three consecutive years results in automatic revocation of your tax-exempt organization with the IRS. This will cause you to go through the entire application process for exemption all over again! And in some states, your status will be revoked within a much smaller time frame.
2) File the right return: The IRS understands the hardship it imposes on tax exempt organizations to file and has made varying levels of returns to help smaller organizations comply. The following are the income thresholds and guidelines for which return you should file:
-990-N (Postcard) – Most small organizations with less than $50,000 of revenue can satisfy their annual reporting requirements by simply submitting an online questionnaire and updating important contact information.
-990-EZ – This is the condensed version of the cumbersome Form 990. It applies to midsize organizations with revenues greater than $50,000, but less than $200,000 and assets less than $500,000. This is a consolidated four-page return that minimizes much of the complexity of the full Form 990. However, all required schedules must still be completed in full if they pertain to the organization.
-Form 990 – For larger organizations that surpass the thresholds for filing any of the other smaller returns, this complex 12-page return covers many different areas of the organization from the annual financial data to the qualitative information regarding internal controls, board members, governance, and management.
3) Hasty Mission Statement: Would you contribute to an organization that described their mission as “charitable activities”? Most donors wouldn’t since it’s lacking description and valuable information. You may not know it, but many informed donors use IRS resources, including your 990, to vet your organization before donating. GuideStar, the IRS database for nonprofit data, publishes every 990 filed under your organization. Pretend the IRS is your biggest donor and prepare your mission statement with them in mind. Your 990 may be reaching your biggest donors!
4) Combining program service accomplishments: Part III of the Form 990 asks for descriptions of your biggest program accomplishments. Don’t fall in the trap of consolidating everything you do into one all-inclusive program. For example, if you provide training services and also provide health services at a discount, these are two separate programs. Be sure to write about them separately and use as much detail as possible (see #3).
5) Understand the checklists: Part IV through Part VI are checklists, statements, and disclosures for your organization to fill out and provide understanding to the IRS. These sections identify the proper schedules you should be filling out, your activity compliance, and how you manage your organization. When completing these questionnaires, understand that a “yes” normally signifies a supplemental schedule to be filed. And in the compliance and governance sections a “no” response may mean you have no controls on your organization. Even if your accountant is preparing the return for you, they will need your input in properly responding to these sections.
6) Compensation: Part VII requires that you show all compensation paid to directors and officers. If you pay any one person more than $150,000, you must fill out Schedule J.
7) Revenue Classification: The average for-profit business entity normally has 10 lines or fewer to report income whereas nonprofit organizations have an entire page dedicated to revenue classification. Part VIII has over 15 lines, multiple subsets, and four different categories that revenue may apply to. Be sure you’re putting the right amounts on the right lines and categories.
-Revenue derived from the activities listed in your mission statement, contributions and program services, should be categorized as “Related or Exempt Function Revenue”
-Certain investment income should be categorized as “Revenue Excluded from Tax”
-If you have revenues that are neither investment income or pertaining to your mission, they are considered “Unrelated Business Revenue”
8) Unrelated Business Taxable Income (UBTI): UBTI are revenues derived NOT in the course of your exempt activity and are subject to taxation at corporate rates. Advertising in your monthly newsletter, a coffee shop in your lobby, or even an investment in publicly traded partnerships may be triggering UBTI. If you have these revenues you may need to file and pay tax on a Form 990-T. But BE CAREFUL, if you have more than 15% of your total revenues coming from these sources, you run the risk of being seen as a business entity and losing your tax-exempt status.
9) Expense Classification: If you thought the revenue reporting was complex, Part IX, the Statement of Functional Expenses, is widely considered the toughest part of Form 990. The IRS requires all 990 filers to breakout their expenses into three categories: Program, Management & General, and Fundraising.
-Program expenses are directly related to your tax-exempt purpose (program supplies)
-Management & General expenses are related to the proper running of your organization or assets and not specifically related to your programs (accounting or filing fees)
-Fundraising expenses are related to raising revenues (mailings and solicitations)
-You may think that everything you do is related to your exempt purpose, but it is not. The bigger your organization is, the more management is required. The purpose of this part is to show the IRS, and donors, where every dollar contributed is going.
Although it would be nice to throw everything in Programing and show 100% productivity, that is actually a sign that either the Form 990 was not prepared correctly or that someone is intentionally misrepresenting their activity. Depending on your organization’s industry standard, percentage application is around 80% Program, 15% Management, and 5% Fundraising. But don’t just multiply each expense by those percentages, that too is a red flag. For each indirect expense, determine the cost driver and apply a methodology for categorizing that expense.
10) Fundraising Activities: Gala dinners, golf outings, or even a bake sale are all considered fundraising activities. These should be broken out from your normal related tax-exempt activities. There’s a special location in Part VIII to report these revenues. Consider these subsets from your normal financial activity in that they should be handled independently from your other activities. The bright side is that you don’t have to include it on Part IX, Statement of Functional Expenses. Also make sure to segregate contributions raised from these events from the actual price of tickets sold for the event. Fundraising activities generating revenues greater than $15,000 require that you fill out Schedule G.
11) Matching: Several sections of the Form 990 or Schedules should match total lines reported elsewhere on the Form 990. Having these areas show different amounts looks sloppy. Make sure the following areas match:
-Part I is a summary of all amounts coming from different areas of the 990.
-Part III, line 4e, Total Program Service Expenses should match Part IX, line 25, Column B, Total Program Service Expenses.
-Part VII, Total Compensation (Column D) should match Part IX, line 5.
-Schedule D, Part VI, Land, Buildings, and Equipment should match Part X, Line 10 of Form 990.
The Form 990 isn’t just an annual filing requirement, it can be one of your biggest marketing tools. Not filing, improperly filing, or hastily filing the Form 990 can create many unintended consequences for your organization. Remember, it’s not just the IRS looking at your Form 990, so are your potential donors! Use the Form 990 as an opportunity to tell your nonprofit’s story.
Cray Kaiser is always here as a resource for you. Please contact us today if you have any questions about filing Form 990.
When it is set up and maintained properly, QuickBooks can be an incredibly helpful and powerful tool for business owners and managers. The software can provide up-to-date financial statements and cash flow data and create general efficiencies in your accounting. However, too often we see that QuickBooks is either underutilized or simply a burden to our clients.
With tax season behind us, we thought it would be helpful to share a few challenges that we encountered with our QuickBooks clients this year. These challenges added additional barriers and complications during tax season. By being proactive and taking action now, you can help make next tax season much easier to navigate.
The most common QuickBooks issues included:
1. Unorganized Chart of Accounts: Your financial statements are the framework that gives insight into your organization’s financial health. The financial statements are born from your Chart of Accounts. It’s easy to think more detail is better, but that’s not always the case. Having too many and/or an unorganized Chart of Accounts can hinder the amount of information provided by the financial statements.
For example, when analyzing financial statements, you often want to perform trend analysis (looking for increases, decreases or baseline for certain items). This can be extremely difficult if there are too many accounts. When this occurs, there is an increased chance of the same account appearing multiple times as a subaccount. Thus, creating confusion for those performing the data entry, resulting in errors in the financial statement reporting.
There are a number of different solutions to resolve this problem:
a. Use subaccounts when necessary to the financial reporting.
b. Merge accounts when you find too many accounts which are similar.
c. Mark the account inactive when you no longer need to use the account.
2. Disorderly Items List: QuickBooks defines the product(s) you sell as “items”. Over time, it’s easy to add inventory anywhere into the system and forget to keep amounts updated. This can sometimes create negative inventory amounts on your balance sheet. Here are a few quick steps to clean up your Items List:
a. Mark any items you no longer sell as inactive.
b. Ensure each item is correctly labeled inventory, non-inventory, etc.
c. Double-check the item exists with your physical inventory.
d. Make sure you keep the costs for each item updated.
e. Assign each item correctly with the proper revenue and cost accounts to ensure accuracy in your financial reporting.
3. Unreconciled Bank and/or Credit Card Accounts: Reconciling your bank and credit card accounts every month is very important. Why? Because it serves as a control to ensure that all cash and credit card transactions are accounted for properly. Performing this function monthly helps you identify problems before they get out of hand. Here are a few steps to take when reconciling your accounts:
a. Review uncleared transactions.
b. Make sure the transaction hit the right account.
c. Check to see if there are any duplicate entries.
4. Incorrectly Applying Deposits to Invoices: When customer balances appear on your accounts receivable aging as a ‘negative balance’, unless the customer has an overpaid balance, this is usually a pretty good indicator that something is wrong. In most cases, this is the result of invoices being applied incorrectly. Every time you get paid by a customer, you should be able to receive that payment against an open invoice. Take a second look to make sure this is happening in your QuickBooks account.
5. Not Applying Payments to a Vendor Bill: Sometimes vendors who have been paid still show amounts due on the AP Aging reports. This creates a situation where a company’s liabilities are being overstated. To correct this, you may need to void or delete the bill that has already been paid. We recommend contacting your accountant before deleting any entries as they may be linked to other transactions.
6. Misusing the Undeposited Funds Account: Are you receiving payments from customers but your cash account isn’t increasing on your financial reports? It’s likely that you’re using Undeposited Funds incorrectly. Undeposited Funds is an internal current asset account created by QuickBooks to hold funds until you are ready to deposit them in the system. When you receive a customer payment, open the deposit module, batch checks together that you’re taking to the bank, and record them as one single deposit in the software.
7. Forgetting to Lock a Closed Period: When you close out a month (or any period), make sure to lock it so that no one can go back and change the amounts that were used to file tax returns and financial statements. Please note that all entries should be made in the current period.
Following these few steps will allow management to make decisions using timely and reliable financial information. By taking the opportunity to implement these strategies now, next tax season will be less stressful and provide management greater opportunities throughout the rest of 2018. Our QuickBooks Pro Advisors team can provide you support in any of the above areas. Please contact Cray Kaiser today for more information on how you can maximize QuickBooks.
Does your company know how it would handle a death, disability or departure of one of its owners? Whether you are part of a family business or not, buy-sell agreements are important to any company. But what makes it so important? A buy-sell agreement, also known as a business continuity contract, spells out how the assets and business interests would be distributed if an owner leaves the business, becomes disabled or passes away.
Without a plan in place, an otherwise thriving company can be thrust into turmoil. For example, the remaining owners may become entangled in legal disputes over business assets and management. If the company’s ownership seems doubtful or its future uncertain, its performance will suffer. And that performance doesn’t stop at the leadership team. Employees may feel less confident in and connected to the work they’re doing without the stability of a clear path forward and a unified leadership team.
The possible departure of an owner isn’t the only reason to prepare a buy-sell agreement. Sometimes an owner voluntarily decides to leave a company to pursue another business opportunity or a well-earned retirement. A carefully crafted buy-sell agreement will facilitate the transfer of ownership by assessing a firm’s value and ensuring that all parties are treated fairly.
A buy-sell agreement is instrumental to create at the outset of the company when all the other organizational documents are being crafted. It’s important not to think of a buy-sell agreement as something that you need down the road. Rather, it’s better to proactive in its creation since many of the scenarios a buy-sell agreement addresses are unpredictable. For businesses that have been in existence for a while and still don’t have one, it’s never too late to establish a buy-sell agreement.
Even if you already have a buy-sell agreement in place, you should review and revise it periodically to make sure it reflects your company’s current situation. Contact Cray Kaiser today if you’d like to learn more about preparing or reviewing your buy-sell agreement.
QuickBooks is the premier accounting software system for small business owners, and with good reason: it features robust reporting, an easy to use interface, customizable invoices, inventory tracking, ease of use when on the go, and more. In fact, recent upgrades have made QuickBooks even more impressive, adding additional flexibility and customization. Here’s what our team learned when they attended advanced breakout sessions at QuickBooks Connect, a three-day conference for accounting professionals:
The conference focused on the latest QuickBooks feature releases and the expanded offering of third-party plug-in modules that allow users to scale the software to fit their particular needs. The key intention of Intuit’s new cloud platform aims to empower business owners to scale their business and allow the software to scale along with them. From restaurants to construction to manufacturing and everything in between, QuickBooks has industry-specific features tailored to your business’s unique needs and allows the end-user and their accountant access from anywhere.
Some of these features include:
A significant portion of the sessions at QuickBooks Connect showcased their latest product, QuickBooks Self-Employed. There’s a good reason for that emphasis: today, roughly three in ten workers are self-employed, and over the next five to ten years, that percentage is expected to double. In keeping with that trend, QuickBooks has added multiple features, including an enhanced navigation and more detailed transaction reports that are specifically tailored to the self-employed individual. Here are a few of the software’s latest benefits that make running your business easier:
Whether you are an accounting professional or a business owner, QuickBooks is designed to streamline processes and simplify your experience. Even so, they can also be more complex to understand and learn. It’s essential to have the right guidance to ensure that your business is using the right version of QuickBooks and is set up for maximum success. If you’re looking for ways to make your accounting processes easier and more efficient, or just want to learn more, contact Cray Kaiser today.
